Ukraine: The IMF's Big Lie

April 8, 2014Steve Weissman / Reader Supported News

Commentary: Like government leaders everywhere, Russia's Vladimir Putin often lies. But when he tells an uncomfortable truth, few people in the US or Europe bother to listen. Take what he said about Ukraine back in 2007, when Time magazine interviewed him as their "Person of the Year." Why, Putin asked, should Russia continue to subsidize Ukraine? "If you want to support someone, you pay for it. Nobody wants to pay."

(April 6, 2014) -- Like government leaders everywhere, Russia's Vladimir Putin often lies. But when he tells an uncomfortable truth, few people in the US or Europe bother to listen. Take what he said about Ukraine back in 2007, when Time magazine interviewed him as their "Person of the Year."

The Russians subsidize Ukraine, Putin explained. They sell it natural gas and other energy resources at $3 billion to $5 billion a year below international market prices. At the same time, the US "somehow decided that part of the political elite in Ukraine is pro-American and part is pro-Russian, and they decided to support the ones they consider pro-American, the so-called orange coalition."

Why, Putin asked, should Russia continue to subsidize Ukraine? "If you want to support someone, you pay for it. Nobody wants to pay."

Putin had it right. In their proposed economic agreement with Ukrainian president Viktor Yanukovych, the Europeans offered very little money. In their negotiations with him during the Euromaidan protests, they and their allies in Washington continued to offer far less than the estimated $20 billion to $35 billion that the country needed.

In February, about a week before Yanukovych ran away, the Christian Science Monitor summed up the situation. Ukraine's international currency reserves were falling at a vertiginous rate. The national currency, the hryvnia, had lost value, and the international credit rating agency Fitch had downgraded the country's sovereign debt. How would Ukraine pay what it owed -- primarily to Western banks and Russia's Gasprom? How would it pay salaries, pensions, and social benefits?

The EU agreement looked to a major infusion of capital from the International Monetary Fund. But that would come only after the Ukrainians agreed to what IMF managing director Christiane Lagarde later called a "profound transformation," especially of its fiscal policy, monetary policy, and policies on energy.

"Nobody is willing to give economic support, from the United States or from the IMF or from Europe, to an unreformed Ukraine," US State Department's Victoria Nuland said in Kiev on February 7.

The Westerners had good reason for being tight-fisted. They knew that the incredibly corrupt Yanukovych and the Ukrainian oligarchs would take the money and stay put. That is how the country's oligarchic system works, with or without Yanukovych. Most of the new billionaires -- including the leading candidate to become the new president, Petro Poroshenko -- made their first big money by "privatizing" formerly state-owned enterprises.

"Ukraine's oligarchs got rich during the privatization sales of former Soviet-owned industries and factories shortly after independence in 1991," explained the Monitor. "The country's main industries of mining, metals, chemical production, and energy distribution were snatched up by individuals, who then reaped millions in profits."

The Monitor did not mention one significant fact. Privatization only came about the way it did with what one academic study called "the support and cajoling of Western donors." Will foreign meddlers never learn?

Nor did the Western-backed rip-off stop with the original sin. Several analysts tell the same story, none more succinctly than the Monitor. "Many of the oligarchs' businesses -- particularly in the mining, heavy industry, and energy distribution industries -- operate in dilapidated, Soviet-era facilities that are extremely energy-inefficient, and heavily dependent on government subsidies."

In other words, when would-be reformers talk about Ukraine's corruption, they mean the oligarchic system. Not necessarily personal corruption, but a pervasive systemic corruption.

"Corruption and politics have always had a close relationship in Ukraine," explains the Monitor. "The oligarchs have benefitted for two decades from close relations with government officials, who have at times turned a blind eye to the activities in exchange for support. At other times, politicians have enabled their oligarch supporters to get richer through key government appointments and a lack of transparency in government contracts."

Systemic corruption also gobbled up foreign assistance. Ukraine has gotten far more aid than any county in the former Soviet Union, energy specialist Emily Holland told Bloomberg Businessweek. And where has it gone? "Into the pockets of an incredibly corrupt political elite and oligarchs."

The Russians, with their own oligarchic system, continued to subsidize Ukraine's energy imports. They also agreed in December to buy $15 billion in Ukrainian Eurobonds, and actually laid out the first $3 billion.

"The economy of Ukraine was going into the wall and was heading for disaster," the IMF's Lagarde told PBS Newshour. "Without the support that they were getting from this lifeline that Russian had extended a few months ago, Ukraine was heading nowhere."

Mounting violence from the protesters, continuing refusal of Brussels and Washington to come up with serious money, and increasing loss of support from the oligarchs convinced Yanukovych to jump ship. Putin responded by stopping the subsidies, which meant raising the price Ukraine had to pay for its energy imports.

Brussels and Washington were left holding the bag, as Putin had suggested they should. So, at warp speed, the IMF and Ukraine's Western-backed interim government came to terms. The Ukrainians would agree to "profound transformation." The IMF would give them something between $14 billion and $18 billion over time.

Having worked as a private banker, central banker, and Minister of Economy, Prime Minister Yatsenyuk knew from the start what lay ahead. "To be in this government is to commit political suicide," he predicted even before the Russians moved into Crimea.

The biggest challenge, he told an investor's conference in Kiev last week, will be to sell Ukrainians on the need for "painful economic reforms." Unpegging the hryvnia from the dollar will likely cause a 3% drop in GDP, he explained. Cutting the public sector by 10% will put a lot of people out of work. Losing the Russian subsidy on energy and simultaneously cutting domestic fuel subsidies will greatly increase the cost of living, though the government would provide "some sort of subsidy" to the poorest five to eight million households.

Yats understood how this would breed discontent, especially in the east and south, where people lean more toward Russia. He knew Moscow was telling them that they would enjoy higher living standards in Russia, with higher wages and better pensions and without the austerity that the Kiev government was now offering. "They're saying: if you go to Russia, you'll be happy, smiling, and not living in a Western hell."

That is Russian propaganda, no doubt. But the message rings true, doesn't it?

Yats has a much bigger problem. He and his Western-backed interim government have gone to great lengths to give the oligarchs even greater power -- far more than to the Svoboda Party or followers of Stepan Bandera in Yatsenyuk's Fatherland Party. In one of their first acts in office, they appointed oligarchs like Ihor Kolomoisky and Serhiy Taruta as governors in Eastern Ukraine, and are already working closely with the country's likely new president, Petro Poroshenko.

Many in the West welcome "the Chocolate King's" presence, especially since he was the highest-profile oligarch to support the Euromaidan protest. Western "deciders" have looked kindly on him for years, as journalist Andriy Skumin wrote in March 2012, just after Yanukovych appointed Poroshenko Minister of Trade and Economic Development.

"European circles, blindly searching for any adequate Western-thinking individuals within Ukraine's establishment, have a favorable opinion of Poroshenko as a person who is reliable, can be charged with introducing changes in Ukraine and ending the deadlock in EU–Ukraine relations" Skumin wrote. But "the preservation of the monopolistic oligarchy will not allow for any European integration or even domestic transformations using European patterns. The only thing that could be done is perhaps only an outward European appearance."

"Profound transformation" requires killing the oligarchic system, which no one in the game -- least of all Poroshenko -- has come close to suggesting. This is the IMF's big lie. Lagarde talks of changing Ukraine, but the people she has entrusted to make those changes are the precisely the ones whose power the country most needs to curtail.

To crib from Vladimir Putin, Poroshenko and his fellow oligarchs are neither pro-American, pro-European, nor pro-Russian. They are not even necessarily pro-Ukrainian, though a bit of patriotic fervor may help them shove austerity down the throats of their underlings. Ukrainian oligarchs, like American plutocrats, are simply pro-themselves.

A veteran of the Berkeley Free Speech Movement and the New Left monthly Ramparts, Steve Weissman lived for many years in London, working as a magazine writer and television producer. He now lives and works in France, where he is researching a new book, "Big Money and the Corporate State: How Global Banks, Corporations, and Speculators Rule and How to Nonviolently Break Their Hold."

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